Monday 5 May 2014 

Brussels / Paris 

In an email exchange with our head of tactical asset allocation, we discuss to what extent markets have surprised so far this year: the euro didn’t weaken, Ukraine hardly had an impact on markets, investors shied away from Japan and bonds have shown an amazingly positive performance. Even if we had a crystal ball, it would not be able to guarantee success. 

Tuesday 6 May 2014 

Paris 

During our weekly asset allocation meeting, our analyst covering earnings presents his views. He remains confident about a much-needed acceleration in earnings growth. Historical relationships between GDP growth or purchasing managers indices (PMIs) and earnings growth in Europe all point in the same direction. A stable-to-lower euro would also help. 

Wednesday 7 May 2014 

Paris 

I have several interesting discussions with our fixed-income managers. Our corporate bond specialists mention that the yield in euro investment grade has now declined to 1.6% on the back of sustained demand and little new supply. How low can yields actually go? High-yield corporate bonds now offer yields around 3.5%, taking into account callable bonds. So credit is expensive but defaults can still go down and ECB policy is biased towards easing, so one accepts the valuations. 

Thursday 8 May 2014 

Amsterdam 

It’s ECB day and as usual I try to follow Mario Draghi’s press conference live via web streaming. The ECB president is extremely clear in terms of policy intentions, stopping just short of announcing a decision that will only be taken at the next governing council meeting in June. Some highlights (the verbatim of the press conference is here: http://www.ecb.europa.eu/press/pressconf/2014/html/is140508.en.html#qa):

  • “The strengthening of the exchange rate in the context of low inflation is cause for serious concern   in the view of the Governing Council.”
  • “While the recovery is firming up in some parts of the eurozone, at the same time, the Governing Council is not resigned to having low inflation for too long, as I said before.”
  • “As I said, we discussed the exchange rate. So at the end of this discussion I would say the Governing Council is comfortable with acting next time, but before[hand], we want to see the staff projections that will come out in early June.”
  • “There is consensus about being dissatisfied with the projected path of inflation, and so there is consensus in not being resigned to this and accepting this as a fact of nature…”
  •  “There wasn't a decision today, in the sense I said it’s a preview of the next month’s meeting, the discussion we had today. But certainly there is consensus or unanimity in not being resigned to the present low inflation for a too long, too protracted a time…”
  • “The Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate to cope effectively with [the] risks of a too-prolonged period of low inflation.”
  • “As I’ve said many times, the exchange rate is not a policy target but it’s a serious concern for our objective of price stability and therefore this concern will have to be addressed.”
  • “It’s actually the exchange rate that keeps the inflation rate low. The exchange rate, both nominal and effective, has appreciated by something like 10% [between] mid-2012 to today.”

The thing about so much clarity is that one ends up over-promising and under-delivering, so the June meeting will be focused on how aggressively the toolkit will be used. This is especially important for the euro exchange rate. 

Friday 9 May 2014 

Brussels 

I finalise a presentation that I will be giving on several occasions next week during meetings in the Gulf region. It focuses on monetary policy divergence (normalisation in the US, additional easing in the eurozone). This creates challenges in terms of central bank communication (the Fed needs to avoid rocking the boat whereas the ECB must avoid creating too-high expectations), asset allocation (Europe should a priori benefit compared to the US) and currency management (when will the EUR/USD at long last decline?). June should bring more clarity: will an ECB promise = ECB delivery?

 

William De Vijlder

Vice – Chairman of BNP Paribas Investment Partners